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Hurricane History to Repeat Itself |  AIG, Gen Re Execs’ Jobs Status in Question |  Retirement Funding Perfect Storm? |  Asbestos: Democrats Call for Trust Fund Review |  When ‘Forever into the Future’ Expires | Big "I" National News

P & C   T R E N D S
Hurricane History to Repeat Itself
NOAA predicts another above-average storm season

While it might seem like just yesterday agents in Florida were helping clients pick up the pieces from Hurricanes Frances, Ivan, Jeanne and Charley, predictions for the 2005 hurricane season are already in---and they’re not pretty.

NOAA hurricane forecasters are predicting another above-normal hurricane season on the heels of last year’s historic hurricane season. For the 2005 season, NOAA is predicting 12 to 15 tropical storms, with seven to nine becoming hurricanes. Of those, three to five storms could become major hurricanes.

How confident are the forecasters? Unfortunately, very. "Forecaster confidence that this will be an active hurricane season is very high," said Conrad C. Lautenbacher, Ph.D., undersecretary of commerce for oceans and atmosphere and NOAA administrator at a press conference earlier this week. Although it's too soon to predict where and when a storm may hit land, NOAA still cautions the public to be prepared.

NOAA’s Atlantic Hurricane Outlook reflects an expected continuation of above-average activity that began in 1995. Since that time all but two Atlantic hurricane seasons have been above-normal. Hurricane season starts on June 1 and ends Nov. 30.

Dr. Steve Smith, an atmospheric physicist and vice president of ReAdvisory, has been researching weather phenomena for 11 years. He agrees with the NOAA's predictions, and additionally has done his own research on the 2004 hurricane season, which concluded that it was an unusual year in one crucial way – seriality. He says should not be surprised to see a repeat of last year.

Smith also believes that, as of today, none of the currently available catastrophe models take into account the cumulative effect of serial storms. "Many insurers will have to critically reevaluate their appetite for risk retention, improve their models, and review how deductibles should be handled moving forward, particularly if the market moves to a per-season deductible structure," he said.

The 2004 hurricane season, he said, was also a reminder that hurricanes are not just coastal events -- the high winds, heavy rain and tornados that are associated with the storms.

With more than 68 million people living in hurricane-vulnerable locations, a major storm could be catastrophic, causing billions of dollars in property damage. Despite the threat of another severe hurricane season, many homeowners are still inadequately insured, according to the the Insurance Information Institute (I.I.I.).

In fact, a recent poll sponsored in part by The National Hurricane Survival Initiative found that many residents along the East and Gulf coasts don't plan to take simple steps to protect themselves and their homes from hurricanes, despite the devastation caused by the hurricanes that struck the United States last year.

The survey reported that 47% of those surveyed had no disaster plan for the hurricane season, 56% of those surveyed said they felt "not too" or "not at all" vulnerable and 25% would do nothing to prepare for a storm, even after a watch or warning was issued. Hurricanes and other tropical storms usually cause widespread flooding, yet only about 25% of homes in flood plains purchase federal flood insurance.

NOAA will issue an update to the Atlantic hurricane outlook in early August just prior to the season's historical peak from late August through October.

Katie Butler (Katie.butler@iiaba.net) is editor in chief of IA.  T O P

P R O D U C E R   C O M P E N S A T I O N   I S S U E   U P D A T E
AIG, Gen Re Execs’ Jobs Status in Question

The job security of several executives came into question this week as investigations into American International Group, Inc. and other companies continue. According to reports, AIG is considering forcing out as many as six or more senior executives, and General Reinsurance Corp. placed two execs on leave.

AIG has eight candidates on a tentative list of people who may be ousted from the company in the coming two weeks, according to Wall Street Journal sources. Their exits would follow the resignation of former CEO Maurice "Hank" Greenberg and firing of former CFO Howard Smith.

What’s the motivation behind the potential firings? "By forcing out more executives, AIG hopes to air any remaining dirty laundry by its self-imposed May 31 deadline for filing its thrice-delayed annual report with the Securities and Exchange Commission," according to the WSJ.

One executive that WSJ sources expect to be pushed out is Chief Administrative Officer Michael J. Castelli, who has been on leave since mid-April.

The WSJ also says that AIG exec Joseph H. Umansky will cooperate with New York Attorney General Eliot Spitzer and "is expected to provide a roadmap for regulators into murky reinsurance transactions that AIG has said improperly burnished its books." In exchange for his cooperation, the WSJ reports that Umansky hopes to avoid criminal prosecution or to face lesser charges.

"The deal with Mr. Umansky could help regulators determine how widespread the questionable practices were, how involved Mr. Greenberg was and whether other employees participated in the activities, according to people familiar with the matter," the WSJ says.

Additionally, Berkshire Hathaway Inc. subsidiary General Re also has placed two executives on paid administrative leave, according to BestWire.

According to the report, one of the execs received a "Wells notice" from the SEC, which signals that the SEC had been investigating the individual and is likely to pursue "some sort of enforcement action." The exec is also the target of a U.S. Department of Justice probe into finite reinsurance transactions, according to a form 8-K filing with the SEC.

The other individual is Milan Vukelic, the CEO of General Re’s London subsidiary, Faraday Group.

BestWire reports that General Re said the job status of the two executives depends on their "continuing cooperation with all government investigations."

In addition, Elizabeth Monrad, former CFO and Board member of General Re, also was issued a Wells notice and was granted a leave of absence from her current position as CFO of TIAA-CREF.

In subpoena news, the SEC issued a subpoena to Genworth Financial for documents pertaining to "certain loss-mitigation insurance products," according to BestWire.

Also receiving a subpoena was Chubb Corporation. Last Monday, it was handed a subpoena by federal prosecutors seeking information on "its use of nontraditional insurance that can artificially enhance financial results," reports the New York Times.

"Prosecutors’ interest in Chubb may indicate that the insurance scandal is widening, even after more than a year of intense scrutiny" by Spitzer and the SEC, according to the NYT.

And on the lawsuit front, AIG faces two new actions. According to the San Francisco Chronicle, San Francisco City Attorney Dennis Herrera filed suit against AIG, "blaming securities fraud for the stock market loss of more than $4.2 million to the San Francisco Employees’ Retirement System."

The article further states that "the suit accuses AIG, Greenberg and others of inflating earnings reports to boost stock prices, which have dropped nearly 30 percent since the company’s May 1 report." The suit looks to recoup losses estimated by Herrera’s office at more than $4.2 million to the retirement fund.

AIG also faces a class-action lawsuit brought against it by its 401(k) plan participants. According to BestWire, "The lawsuit alleges AIG violated the Employee Retirement Income Security Act by allegedly ‘failing to disclose improper business practices, and disseminating false and misleading financial statements to investors,’ leading to a devaluation of AIG stock held by current and past employees with 401(k) plans."

Jennifer Sikorski (jennifer.sikorski@iiaba.net) is IA’s associate editor. T O P

L & H   T R E N D S
Retirement Funding Perfect Storm?

During the past year, retirement planning’s focus was on possible Social Security changes. One of the most contentious points of the debate is the actual urgency of situation. Is the problem occurring right now? Is it 10 years out? Forty years out? The answer is a function of several factors such as improved mortality, declining birth rates and the unfunded nature of the system.

Recent converging economic events emphasize the impact of retirement funding. The new buzzword is "legacy costs." This month, two important events occurred: (1) The downgrading of General Motor’s debt to essentially non-investment grade; and (2) The assumption of United Airlines’ retirement plans by the Pension Benefit Guarantee Corporation. The projected drain on GM of its retiree pension and health care obligations, coupled with United Airlines un-funding its retirement plans, significantly hurts bondholders and employees. These actions also harm common stockholders in other corporations with large legacy costs because it makes it more tempting to go into bankruptcy protection to shed or shift the costs to the government.

Aside from the impact to owners, lenders and employees of these companies, how does this affect independent agents? These events, coupled with continuing dismal returns for stocks, will increase the peoples’ desires to seek guaranteed retirement income.

When addressing this issue, important factors to cover with clients include investment return and mortality. Legally, from a product standpoint, products that provide a guarantee of life income are deemed to be insurance and, as such, are provided by insurance companies. As more people look to replace the government safety net of Social Security payments, the logical alternatives are innovative products from financially secure insurance companies. One consequence of this migration will be an increased ceiling of the state guarantee funds so that consumers will be protected for larger amounts. Most states cap the aggregate from insurance and annuity payments to a maximum of $300,000 and have not raised this level in years.

As independent agents review their long-term business strategies, having a core competency in retirement planning and products will be a viable way to cross-sell personal and commercial lines books of business. It’s also an appropriate time to review your agency’s employee retirement plans so that your employees will have the resources to retire without sacrificing their standards of living.

Dave Evans (dave.evans@iiaba.net)  is a certified financial planner and life-health contributing editor for IA magazine.  T O P

O N   T H E   H I L L
Asbestos: Democrats Call for Trust Fund Review

Democratic members of the House Judiciary Committee have asked the Government Accountability Office (GAO) to detail potential issues with the proposed injury trust fund that forms the centerpiece of asbestos reform legislation now being discussed in the committee’s Senate counterpart, according to a report in National Underwriter.

In a letter to Comptroller General David M. Walker, the Democratic members asked the GAO to "study the efficacy, fairness and solvency of various trust funds and programs established to compensate individuals for harm caused by mass torts and other exposure to dangerous materials and products."

The members asked the GAO to review similar victims’-compensation programs created by Congress including the Energy Employees Occupational Illness Compensation Program Act and the Radiation Compensation Act. Additionally, it wants the GAO to look at other trust funds brought about by legislation or bankruptcy court orders.

The Democratic signers ask the GAO to report on instances in which these types of programs did not pay beneficiaries their full compensation or delayed payments, and also to report on the administrative costs of such initiatives.

Additionally, the letter calls for the GAO to investigate whether beneficiaries who otherwise would have been eligible to sue have been denied claims, and also for any evidence of discrimination in these programs.

The Fairness in Asbestos Resolution (FAIR) Act, proposed in the Senate by Judiciary Chairman Arlen Specter (R-Pa.) essentially would halt asbestos lawsuits and pay claims from a $140 billion trust fund to compensate claimants, but there has been discussion that claims not settled in a set period of time could "leak" back into the court system. While the Big "I" supports reforms to the system, it has serious concerns about establishing a trust fund yet still potentially allowing for lawsuits.

Cliston Brown (cliston.brown@iiaba.net) is Big "I" director of public affairs/media relations. T O P 

F O R M S   &   S U B S T A N C E
When ‘Forever into the Future’ Expires
What Do You Know About Discontinued Operations?

A homebuilder decided to hang up his hammer and retire to Florida. He contacted his agent to see what he needed to do about his insurance, which was coming up for renewal. The CSR advised him that he needed to do nothing. He had a CGL occurrence form and the CSR told him that, unlike a claims-made form, he was protected "forever into the future" for claims. So, the contractor retired to Florida and enjoyed the good life...for two years.

The deck on a home he had built on a hillside collapsed during a party, sending 35 people snowboarding down the hill without snowboards—or snow. Luckily, no one was killed, but several people were injured enough to require medical attention. A claim was filed against the contractor, who contacted his agent, who contacted the carrier, who advised that he had no coverage.

At this point, the CSR, producer and agency owner finally took the time to read the contractor’s CGL policy. What they learned was that, while the CGL does indeed cover claims "forever into the future," the claim must arise out of an occurrence that takes place during the policy period. An all-too-common misconception is that the occurrence happens at the time of the negligence; in this case, when the deck was inadequately secured.

However, a careful reading of the CGL policy’s Insuring Agreement reveals that "This insurance applies to ‘bodily injury’ and ‘property damage’ only if...[t]he ‘bodily injury’ or ‘property damage’ occurs during the policy period." So, no CGL coverage. Fortunately (for the contractor), the claim was covered—by the agency’s E&O policy.

Discontinued operations coverage and discontinued products coverage is a necessity for most contractors, manufacturers and others with similar exposures. Unfortunately, not every company writes this coverage, so it may be necessary to provide it on a surplus lines basis. So, be wary of this often misunderstood exposure, or you may find that your agency's operations will be suspended.

REQUEST FOR INFORMATION: If you represent a carrier who sells discontinued operations or products coverage, please e-mail bill.wilson@iiaba.net to advise the company (if possible, include a form sample).

To read the entire article on the Virtual University Web site, click here.

Bill Wilson (bill.wilson@iiaba.net) is the Big "I" director of Virtual University.  T O P